The performance of ALK stock with respect to the index has been quite volatile over recent years. Returns for the stock were 0% in 2021, -18% in 2022, -9% in 2023, and 66% in 2024.
In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, 24% in 2023, and 23% in 2024 — indicating that ALK underperformed the S&P in 2021 and 2023.
Alaska Air reported revenue of $3.5 billion in Q4'24, 38% higher than the prior-year quarter's figure. Alaska reported a 33% rise in available seat miles, while the load factor was up 90 bps, and yield was up 1%.
Fuel costs per gallon plunged 25% y-o-y. Pre-tax consolidated margin stood at 3.9% in Q4'24 vs. 2.2% in the prior-year quarter. This meant that the earnings expanded to $0.97 on a per-share and adjusted basis, compared to $0.30 per share in Q4'23.
Below are key drivers of Alaska Air Group that present opportunities for upside or downside to the current Trefis price estimate.
Fuel Costs % Of Passenger Revenues: Fuel costs represent the most significant operating expense for any airline. Alaska Air has seen a decrease in its fuel costs as a percentage of passenger revenues, dropping from 30% in 2022 to 23% in 2024. Our current projections anticipate a slight increase in this metric to approximately 23.5% by the end of our forecast period.
However, if fuel costs were to remain at 30% of passenger revenues by the end of the Trefis forecast period, rather than following our current forecast, there could be a potential downside of over 35% to our forecast.
Alaska's Passenger Yield: Alaska Air's Passenger Yield, a measure of the average fare paid per passenger-mile, has remained stable at around $0.17 in recent years. Our projections indicate an increase in this metric to over $0.20 by the end of the Trefis forecast period.
Nevertheless, if passenger fares were to increase more than currently anticipated – potentially driven by persistently high crude oil prices or strong growth in flight demand – pushing the yield to $0.26 by the end of the Trefis forecast period, there could be a potential upside of approximately 30% to our price estimate.
Established in 1985, Alaska Air Group comprises two main subsidiaries: Alaska Airlines (Alaska) and Horizon Air (Horizon). These entities collectively facilitate passenger air travel for over 24 million passengers annually to more than 120 destinations across the United States, Canada, Mexico, and Costa Rica. Additionally, the group provides freight and mail services, with a significant focus on operations within Alaska and along the West Coast. While both Alaska Airlines and Horizon Air operate as airlines, their operational strategies, competitive landscapes, and economic vulnerabilities differ considerably. Alaska focuses on longer-distance routes utilizing a fleet primarily composed of Boeing 737 aircraft, along with Airbus A320 family aircraft. In contrast, Horizon Air operates shorter, regional routes, mainly employing Bombardier Q400 aircraft.
Regarding its service network, Alaska Airlines provides extensive north-south connections within the western United States, Canada, and Mexico, alongside passenger and dedicated cargo services to and from various locations within Alaska. It also offers long-haul east-west services to Hawaii and numerous cities in the mid-continental and eastern U.S., with Seattle serving as its primary hub with the highest concentration of departures, although long-haul flights are also available from other cities.
Horizon Air stands as the largest regional airline in the Pacific Northwest and is a significant contributor to Alaska Air Group's regional passenger revenue. It serves numerous cities across six states in the Pacific Northwest, multiple destinations in Canada, and several in Mexico.
Fuel expenses represent the largest single operating cost for airlines, including Alaska Air Group. Consequently, fluctuations in crude oil prices can significantly impact profitability. For Alaska, fuel costs constitute a substantial portion of its total operating expenses. To mitigate the risks associated with fuel price volatility, Alaska Air Group employs fuel price hedging strategies.
The demand for air travel exhibits a strong correlation with global economic growth. Economic downturns or recessions typically lead to a reduction in flight demand, affecting passenger traffic for airlines. Conversely, sustained growth in the global and U.S. economies tends to increase the demand for air travel, potentially enabling airlines to raise fares, improve occupancy rates, and enhance profits.
Alaska Air Group, like many airlines, is actively exploring and expanding ancillary revenue sources, such as fees for baggage, onboard Wi-Fi access, and the purchase of food and beverages. To capitalize on these opportunities, airlines are investing in enhancing their service offerings, including improved in-flight Wi-Fi and entertainment options, upgraded lounge facilities, and seats with additional legroom.
Studies indicate that North American airlines collectively generate substantial ancillary revenues compared to other regions. This growth is largely attributed to more effective merchandising strategies by carriers and the introduction of a wider array of à la carte services.
Over the past decade and a half, low-cost carriers have established a significant presence in the market. As overall travel demand continues to rise, it is anticipated that these low-cost carriers will capture a considerable share of this increasing demand.
The U.S. airline industry underwent significant consolidation in the decade leading up to the mid-2010s, marked by major mergers such as US Airways and America West, Delta and Northwest, United and Continental, Southwest and AirTran, and American and US Airways.
This period of consolidation has generally contributed to improved profitability across the airline industry by fostering more disciplined capacity management. Previously, airlines often expanded capacity aggressively to gain market share, leading to an oversupply of seats and consequently压低 margins and profits for all carriers.
Looking ahead, the industry is expected to maintain profitability as long as airlines continue to manage capacity growth responsibly. While large-scale mergers have become less frequent in recent years, strategic partnerships and joint ventures remain important aspects of the competitive landscape.
